Financial mgt. DIFFERENT FUNCTIONS 1.

Managing old and new assets so that every asset contributes to the max extent possible toward profitable operation of your business 2. Ensuring the assets that you have are used to bring the max return possible on the money that you invest. 3. Obtaining funds to finance addtl. assets 4. Evaluating the need for new assets 5. Repaying borrowed moneys from profits that have the same money has generated Working Capital • • • CA – CL Circulating lifeblood of your business Lack of control of this lifeblood is the primary cause of business failure in firms of all sizes

Accounts receivable • Must be closely watched, you should note whether the amount of accounts receivable are reasonable in relationship to your overall sales and the age of these accounts and, of course, what action you can take to speed up collection or whether such accounts should be eliminated in the future.

Inventories • Inventory may wake up better than 50% of your current assets this is a significant amount and means that you must keep a close watch on this account. A rapid turnover of inventory is impt and should be compared with that of other firms in your industry.

Accounts payable and trade notes payable • Unlimited amt. of credit are not good for your business even if you could obtain them. You should note the amt of credit and how it is compared w/ your pureless

notes payable • To banks or perhaps even to individual lenders of the former owner of your business

Frequently calculated for specific dates Business is not comparable Ave collection period - # of the day Inventory turnover Profitability measures • ROI

➢ Liquidity ratio ➢ Current ratio ➢ Acid test or quick ratio CREDIT IN TODAY’S ECONOMY When to give and how to collect money owed you Factors that influence your company’s credit policy • • • • • • • • • Nature and size of business Overall business objective General policy of business Product / service requirements Channels of distribution Classes of customers Condition of competition Price of product or services Expectations of customers

BASIC ELEMENTS OF YOUR CREDIT POLICY • To whom credit is extended a. Personal judgment –plays an impt part in determining whether to grant credit b. Investigation – helps protect you from an individual or a firm that really has no intention of paying at all c. Credit application – information can be gained d. Evaluation factors ○ Ability to pay – based on income & obligation ○ Willingness to pay – determined from the applicant’s past credit history ○ Potential profitability – determined by own analysis a. Application evaluation ○

3/10 – 3% discount for 1st 10 days 1/15 – 1% discount for 15 days n/60 – bill due net on the 60th day MOM – middle of month -Billing is on 15th of the month including all purchases made since the middle of the previous month EOM – billing is at the END OF MONTH, covering all credit purchases of the month CWO- CIA (cash in advance) –orders received are not processed until advanced payment is received CBD – merchandise may be prepared & packages by the seller, but shipment is not made until payment is received COD – amt of bill is collected upon the delivery of goods SD-BL - a negotiate bill is lading, accompanied by the invoice & sight draft drawn on the buyer, is forwarded by the seller to the customer’s bank. The bill of lading is released by the bank to the customer only upon his honoring of the draft. 2/10, n/30, ROG (receipt of goods) – 2% discount for 10 days; bill due not on the 30th day, but both discount period & 30 days start from the date of receipt of the goods, not from the date of the sales 2/10, n/30, MOM – 2% discount for 10 days, bill due not on the 30th day, but both period start from the 15th of the month following sales date

2/10, n/30, EOM – same as the previous except both period start from the end of the month on which sales was made. 8/10, EOM – 8% discount for 10 days, bill due net on the 30th day. 30th period starts from the end of the month following sales of date. REMINDERS: • • Remember that you are not obligated to grant credit. Therefore, never fool yourself into building up false sales when the chances of getting paid are poor. Deflecting problems must be essential part of your credit and collection program. One way to do this is to calculate the average collection period.

COMPARISON TO DETERMINE WHETHER A PROBLEM EXISTS 1. Payment terms – How does the average collection period compare with the terms of sales that you offer? 2. Past history – How does your current average collection period compare with that w/c you had in the past? Are the things getting better or getting worse? 3. Industry averages – How does your average collection period compare with those other companies in your industry? • • • Collection Procedures The fundamental rule of collection is to minimize the time bet. The sales or performance of the service and collection of money. Invoices – preparation is crucial to your collection procedures. Your invoices should be prepared promptly and accurately. Statements – statements keep customers advised of their account balances and monthly statement To all creditors with open accounts **open accounts – unlimited liability, opposite of credit limit. *loose leaf – cargo; given instead of OR for record purposes Sample: time delivery contract (TDC) Commercial TDC Delinquency charges –delinquency charges are applied against late payments to discourage customers from allowing their accounts to become overdue. • Lateness follow-up – when your customer clients don’t pay, you should initiate a follow-up immediately • Collection letters – an initial collections letters should be used when the account become approximately 15 days past due. • Use of the telephone – the telephone can be used either with letters or by itself. It can be even more persuasive since you get immediate feedback and can respond directly to the information given by the individual. EXTERNAL COLLECTION PROCEDURE • Collection agencies – collect past due accounts receivable for your business

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Courts of law – a court is the final resource for collection Credit insurance – available only to manufacturers and wholesalers that sell to other business firms. This is because it is difficult to analyze the risk involve in selling to ultimate consumer, and because the retailer’s need from credit insurance is not as great because the retailers risk is spread among a greater number of customers.